The recent commencement of legal proceedings against Tim Horton’s by a group of its franchisees has captured the attention of the nation. Certainly, the claim by the plaintiff franchisees for damages of $500 million is newsworthy, but the substance of the dispute may not be known to all.

Essentially, what is at issue is whether Tim Horton’s made appropriate use of the franchise advertising fund. This is a concept that virtually every franchise system encounters to some degree.

A common feature of a franchise program is the general advertising fund. Under franchise agreements, franchisees are required to contribute either a flat rate or a percentage of their sales to a collective pool that the franchisor uses to fund advertising programs and marketing activities. This is typically one of the elements that is attractive about the franchise business model. The aggregated purchasing power that advertising fund contributions allows means that a franchisor has considerable sums available to it to spend on marketing campaigns that ideally benefit the entire network of franchisees.

But it doesn’t always work that way. While franchisees acknowledge in their signed franchise agreements that they may not benefit from advertising activities in a manner that is proportionate to their advertising fund fees, that can still be a source of a lot of friction between franchisors and franchisees in practice.

Picture this: You are the first Vancouver franchisee of a Toronto-based franchise system and find that a majority of the advertising fund (including your contributions) is being spent on activities in the area where the bulk of the franchisees are located, namely Toronto. Or you are a franchisee watching ad fund dollars get spent on local billboard and mailer campaigns, but not on the Facebook advertising that you think is a better use of those monies. Or you feel that too much of the ad fund contributions are being spent on activities that don’t benefit franchisees, but rather on activities that promote stores owned by franchisors or recruitment activities to solicit sales of new franchises.

Alternatively, put yourself in the shoes of the franchisor. One of the reasons franchisees opted to invest in a franchised business was to gain the benefit of your judgment, experience, resources and purchasing power. Franchisees, then, should trust that you are spending their advertising fees on campaigns and activities that generate brand awareness and, by extension, their businesses. After all, it’s worked out well for everyone so far.

Now imagine that you are involved in Tim Horton’s, Canada’s largest and most iconic homegrown chain of restaurants. Whether you see yourself as a franchisee or the franchisor, you are faced with the dilemmas I have outlined. Now you understand the crux of the litigation. A group of franchisees (by no means all) are alleging that Tim Horton’s has misspent and misappropriated advertising fund contributions on activities that do not benefit the network of franchisees.

Any judge presiding over this litigation is likely to pay particular deference not to whether the advertising activities were successful, but whether they were reasonable, whether they made good business sense.

Interestingly, a few years ago, Tim Horton’s was successful in a class action claim by a group of franchisees who alleged that the franchisor’s then-new lunch menu was implemented with a view toward lining the pockets of head office at the expense of franchisees who had to invest in new equipment and infrastructure. In deciding in Tim Horton’s favour, the court expressed that becoming a franchisee does not mean one is guaranteed financial success. What a franchisee is to be assured of is that a franchisor will bring its seasoned and reasonable business judgment to bear on decisions that affect the franchise system, and those decisions don’t always have to be right.

As this high-profile litigation unfolds over the coming months (and years) we should all expect to see a forensic analysis of Tim Horton’s advertising programs and a judgment as to whether those expenses were reasonable, fair and in the interests of promoting the brand.